Europe crumbles: The domino effect on the rest of the world

Trust Singapore's aged leader Lee Kuan Yew to offend a few millions Greeks with his latest and slightly derogatory remark, "You cannot expect the Greeks to march like the German". However, Kuan Yew is right, not always but many a time. Everyone in the markets of the world is watching and waiting to see how Europe will crumble.

“Greece is on a knife’s edge and if they can’t meet the aid terms then it’s up to them to figure out how to get financing without euro zone’s help”, says Wolfgang Schaeuble, German Finance Minister. German Chancellor Angela Merkel's government is already preparing Plan A, which is preparing plans to shore up its banks and insurance companies should Greece fail to get its next tranche of the bailout money. German’s banks and insurance companies are expected to lose up to 50% on their exposure to Greek bonds.

According to a study by the IMF, the current accounts of the seven nations of the Southern Europe Area (SEA), have gone from being in balance of payment surplus in 1994 to balance of payment deficit averaging about 10% in 2008. That means these nations are worse off than before they joined the EU. This is a dismal comparison against the Northern Europe Area (NEA) , where the eight nations there showed positive balance of payments over the same period of time.

Data from IMF and other international economic organizations point out that “the decline of the balance of payments from these countries coincide with their entry into the European Monetary Union” or EMU, because with the introduction of the Euro, it escalated the balance of payments deficits by allowing member nations to maintain their investment levels above what they can be afford to finance locally.

In short, the unionization of Europe is responsible for the current economic crisis that is currently ravaging the economies of Portugal ,Ireland ,Italy ,Greece and Spain (PIIGS) for short.

What's so important about Greece

The debt/GDP ratio for Greece stands at 140% at the moment and will be 180% by year-end. Its deficit running at 15% meaning, it cant afford to even make interest payments. The latest Greek Government 1 year Bond now yields 111.7%. Yes, Greece’s default has been priced in with more than 100% return.

Basically, Greece is now a dead corpse lying in the coffin and probably in the middle of its wake. Next, will be the parade through the streets and eventually to be buried in one of Wall Street’s many graveyards, and of course under the supervision of Goldman Sucks (Goldman Sachs) and JPMorgue (JPMorgan).

Nobel Laureate Nouriel Roubini, warned that “without massive stimulus by the governments of the western world, we are going to see a major financial collapse and we will find ourselves plunging into a depression ….”

Why is Greece important? Greece is important because most major banks in Europe are exposed to Greek debt. If Greece were to go under, a lot of European banks will follow suit. When Greece defaults, it will create a chain reaction, Italian and Spanish economies that are too big to bailout (TBTB) will eventually lead to a collapse in the international financial markets, due to their exposure.

So, what are the scenarios if Greece defaults? Most likely, it will be the best thing to ever happen to Greece since the crisis because they are no longer bound to IMF austerity measures and being held ransom by the bankers. Ordinary Greeks will be relieved their lives will no longer be dictated and run by someone else. Similar to Iceland, where the country was brought down by the country’s four largest banks. Due to greed, they basically turned Iceland into a large Sovereign hedge fund. Everyone seems to be a fund manager as people abandoned the fishing industry to go into the financial industry.

Instead of succumbing to pressure from the European Banking Authorities to accept the IMF, it decided to default. The Icelandic people continuously voted against paying back the European Bankers, especially its Internet bank Icebank, which has a deposit base of about 600,000 European account holders.

A new order in Europe

Another repercussion from the Greece collapse, will be the reintroduction of the drachma. Since 2001 Greece has been happily discarding the drachma and embracing the Euro, in order to join the EU. With the help of Goldman Sachs, to hide its true figure of its bloated debt which was already accumulating at that time, it managed to gain membership into the Euro zone.

If Greece decided to default, then it will be kicked out from the EU and it will be free to print its own money again. In other words, it can monetize its debts again but without having to devalue its currency first. In such an event, the drachma will be devalued by at least 40%, so bond holders will have to take a haircut of at least 40%.

Thirdly, looking at the horizon when Greece defaults, what will it be of the rest of the PIIGS? If Greece defaults, then who is going to lend money to the rest of the PIIGS (Portugal, Italy, Ireland, Greece and Spain)? Their bond yields are going to go through the roof, most likely approaching Greek levels. Bond prices will head south because Debt yields are inversely related to debt price. In layman terms, it means the higher the interest rates the lower the bond price.

When the shit hits the fan (SHTF), everybody will be running for cover and will be looking for other safe havens instead of buying Portuguese or Spanish bonds even though the yield might be 120%. Nobody is going to touch their bonds not even with a 10ft pole, because they know that at the end of the day they will not get paid.

Lastly, Greece’s default will ultimately lead to a credit crunch in the Euro zone. Billions will be written off from European banks that have exposure to Greece. As a result, Europe’s too big to fail (TBTF) banks, will again be looking for another bailout to recapitalize their reserves in order to begin lending again.

At the end of the day, we may foresee a different Europe emerging, most probably with the Southern Europe Area or the Mediterranean countries being kicked out of Euro Zone, leaving the Northern Europe Area or Nordic countries intact.

- Malaysia Chronicle